Electric vehicle stocks have surged higher in 2020, led by Tesla's 256% year-to-date gain. Tesla is now the world's most valuable auto stock, with investors convinced that after years of hype about electric vehicles (EVs), the future has finally arrived.
Tesla is hardly the only stock available to investors interested in buying into the trend. We've seen a number of early-stage vehicle producers enter the public markets in 2020, joining traditional automakers and suppliers that are expanding their expertise into electrification.
Many of these newcomers are trading at meteoric valuations and arguably aren't suited for investors without a high tolerance for risk. But given the impressive performance, and the potential as the world moves away from the internal combustion engine, the sector is dangerous to ignore.
The Tesla of trucks
Lou Whiteman (Nikola): Nikola hasn't been public for long, having only merged with a special-purpose acquisition company in June, but the company has attracted a great deal of interest in a short amount of time.
The company is billed as the Tesla of trucking, and the comparison works, both because of its focus on alternative power trains and because of the hype surrounding its efforts. Nikola has been in business since 2014 and has more than 14,000 reservations for its electric and hydrogen fuel cell trucks, but won't start production until next year at the earliest.
Nikola at this writing trades at a market capitalization of $11.9 billion, more than 40% of Ford Motor's valuation, on the promise investors see in the company and not on its actual results. Still, it will be interesting to see the financial shape of the business, and management's outlook, when Nikola issues its first quarterly-earnings report as a public company after markets close on Aug. 4.
Nikola's stock has been volatile, with the shares soaring above $90 shortly after the deal was finalized, but recently dipping below $30 after the company began redeeming warrants, leading to more shares being available for trade.
More shares are due to come on the market before year's end, which could put further pressure on the stock in the months to come. There is also talk that the COVID-19 pandemic will delay the start of production, which would keep Nikola in a dangerous pre-revenue stage for longer than anticipated.
Then again, Tesla has missed plenty of deadlines over the years, and investors who believed in the promise despite the speed bumps have been richly rewarded. My bet is that even if Nikola says something on its earnings call that disappoints investors, the stock will be able to shrug it off pretty quickly. And giving management a podium to reiterate the potential market opportunity Nikola is trying to capture should help restore the excitement surrounding the company.
Pre-revenue companies are full of risk, and investors should make stocks like Nikola at most a very small part of a broad portfolio. But whether for entertainment purposes or to potentially buy in, Nikola is a stock to watch in August.
After an electrifying first half, what's NIO's next move?
John Rosevear (NIO): NIO has had quite a year, and we haven't even made it to September yet.
China's homegrown Tesla rival began the year dangerously short on cash and watching its sales fall drastically amid the COVID-19 outbreak. But then the company's story got some plot twists, including a big cash infusion and an impressive sales bounce as the pandemic faded.
Investors began snapping up shares at the end of May after NIO secured almost $1 billion in new funding from economic development authorities in China's industrial heartland. As you can see, the buying accelerated in early July after NIO reported that its second-quarter sales had nearly tripled from a year earlier.
The story here goes a bit deeper. NIO ran short of cash in part because it had spent aggressively (and prematurely, some analysts thought) to expand its sales and service network last year. But as we saw in the second quarter, that expansion is already paying off with impressive sales growth, leading investors to reconsider: Maybe CEO William Bin Li is more astute than we thought.
That would obviously be bullish. But is NIO still a buy after that run? While the company is some distance from profitability, Li and other NIO executives have hinted that those strong second-quarter sales results and improved operational efficiency powered a positive gross profit margin, which would be a milestone.
Of course, we also want to hear how the company plans to take its growth to the next level. We'll find out when NIO reports its second-quarter results, likely later in August.
Electric cars from Canada? Yes, from Canada.
Rich Smith (Magna International): Which EV stocks should you be watching in August? Well, this being earnings season, I'd venture to suggest the ones reporting earnings! And speaking of which, Magna International is set to report its fiscal Q2 2020 results before market open on Aug. 7.
Magna International is a contract manufacturer to most of the world's largest automakers. (Ford, General Motors, Toyota, Volkswagen, and BMW all number among its customers). Magna's been making a big push to become a bigger part of the electric car supply chain in particular, developing a 48-volt "mild" hybrid power train for BMW, and offering plug-in hybrid and fully electric power trains.
In China, Magna has even inked a deal to build entire electric cars for local manufacturer BAIC Group -- as many as 180,000 annually, with the first scheduled to arrive later this year.
Analysts aren't super optimistic about next week's earnings, though, predicting Magna will report a loss of $1.65 per share versus its $1.59 per share profit of a year ago. But even if they're right about that, this would be only Magna's second quarterly loss in the last 10 years. That's hardly an epidemic of failure, especially when viewed in the context of a global pandemic. And even if analysts are right about this quarter, they still forecast that Magna will end up profitable by year's end, and that it will continue growing earnings next year and the year after that.
Speaking of profits, based on trailing 12-month earnings, Magna stock sells for a price-earnings ratio of 15.5 but a price-to-free-cash-flow ratio of just 5.5. I challenge you to find a cheaper way to play the electric car revolution than that.